On the news that the RBI will increase the borrowing costs, India's 10-year bonds dropped and simultaneously pushed up the yields to their highest level in three months.

On Tuesday, the RBI had said that it "may have to receive precedence over other policy objectives." After this, the bond yields climbed up by five basis points during this week, just before the government was to auction rupees 80 billion.

Looking at this movement, the traders believe that the first round of interest rate hike will happen soon and that is the reason why the investors are staying away from taking up any kind of position.

The bond which is due in May 2020 saw its yield go up 7.8 per cent or 1 basis point. They are now at 8.02 per cent.

It is expected that the central bank's policy rate will go up by 25 basis point each in its next policy review.

Because of that the reverse-repurchase rate, which takes out money from the bank is at 4.5 per cent. The overnight repurchase rate was at 5.75 per cent. RBI had last raised its rate in July 27.